Private equity firms are joining a global borrowing surge to draw dividends from their Australian investments, prompting the nation’s banks to compete against U.S. lenders for the business.
Pacific Equity Partners Pty is talking to financiers here and in the U.S. as it seeks a fifth loan this year to refinance and extract cash from the Sydney-based fund’s investments. KKR & Co. (KKR) is tapping banks in Australia to borrow A$300 million against its medical business Genesis Care Pty to help pay itself a dividend. There have been about $5 billion of such loans in the nation in 2013, according to data compiled by Bloomberg.
Private owners of Australian companies, from PEP to TPG Capital, are capitalizing on favorable debt markets to return cash to themselves, even as some consider stake sales that would end their responsibility for those businesses. Local banks are striving to maintain lending business in the face of competition from the $2 trillion U.S. high-yield market, where so-called covenant-lite debt is tied to a rate at least 200 basis points lower than the South Pacific nation’s benchmark.
“What the banks seem to be doing is to compete more aggressively for what they perceive as limited growth opportunities,” said Brian Johnson, a Sydney-based bank analyst with CLSA Ltd. “I certainly see credit underwriting standards at the moment being loosened. Quantitative easing has lowered interest rates around the globe and that fuels all sorts of excesses.”
Loans that fund payouts are surging as firms borrow cheaply against investments to pay themselves rather than sell assets at a time when merger and acquisition activity is slowing. While high-yield loans borrowed in the U.S. for buyouts have fallen by more than two-thirds since 2008, dividend loans have risen almost ten-fold, according to Standard & Poor’s Capital IQ Leveraged Commentary & Data.
“In an environment of relatively lower deal volumes and a greater supply of lenders putting money to work, that creates a positive environment for issuers,” John Whelan, Commonwealth Bank of Australia’s head of acquisition and leveraged finance, said in an interview. “The improved terms and conditions are a function of the levels of supply and demand.”
Australian banks are competing with the U.S. high-yield Term Loan B market, which issues loans with fewer conditions and financial checks. In the past year, local companies including Fortescue Metals Group (FMG) and Hoyts Consolidated Pty have borrowed in that market, whose lenders are often institutions. More than $418 billion of leveraged loans have been raised in the U.S. this year, a 69 percent increase on the same period in 2012, according to a UBS AG report.
The rise in Australian dividend loans reflects “competition in the global lending markets, coming principally out of the U.S., and the progressive reduction of the base rate in the local market,” said Tim Sims, a managing director and co-founder of PEP, in an interview.
KKR is tapping lenders in Australia for a dividend recapitalization on Sydney-based Genesis Care, after failing to lure U.S. investors for a similar deal in June, said people familiar with the matter on Aug. 30. New York-based KKR may also borrow in the U.S. against Australian mining services company Bis Industries Ltd., even as it considers ways to exit the 2006 purchase, two other people familiar with the situation said.
PEP is borrowing $1.05 billion in the U.S. against Spotless Group Ltd., the Melbourne-based facilities services company it bought in August last year, said a person familiar with the matter last month. The debt will replace A$686 million of loans provided by Australian banks for the purchase. PEP is also seeking a dividend recapitalization locally for Peters Ice Cream, the people familiar said, after acquiring the Australian food company founded in 1907 last year.
Spotless’s debt is expected to rise to 7 times earnings before interest, taxation, depreciation and amortization following PEP’s refinancing, S&P said Sept. 9. The company assigned Spotless a B rating, citing its “highly leveraged” risk profile as a constraint on the grade.
The rush by firms to borrow at record-low costs before an easing of Federal Reserve stimulus measures comes as Australian banks face slowing credit growth amid a waning mining boom. The annual rate of private lending growth was 3.2 percent in July, compared to 4.2 percent a year earlier, according to central bank data.
Australian government 10-year yields climbed 27 basis points this month to 4.17 percent yesterday, the highest closing level since March 2012, as prospects the Fed will pare quantitative easing drove a global slide in bonds. The premium over similar-dated Treasuries widened 11 basis points since Aug. 30 to 122 basis points.
The Aussie dollar dropped 0.7 percent to 92.62 U.S. cents as of 12:28 p.m. in Sydney, after government data today showed payrolls unexpectedly fell last month and the jobless rate rose to a four-year high.
The decrease in M&A volumes has coincided with more lenders, including investment banks and institutions, chasing new business, which is forcing local banks to be “more active in pursuing the available transactions,” said CBA’s Whelan.
Alinta Energy Holdings Pty, the Australian power company controlled by London-based TPG Capital, in August raised $1.1 billion of loans in the U.S. that returned about $800 million to its owners, according to two people familiar with the matter. The debt repaid loans from banks including Australia and New Zealand Banking Group Ltd. and Macquarie Group Ltd., while also giving TPG flexibility to exit the investment by early 2015, the people said.
“There’s no reason why you can’t recap and exit,” said PEP’s Sims. “They’re not mutually exclusive alternatives. On the contrary, it can be a very powerful way to prepare a business for a sale -- not to avoid a sale.”
Link Group, a Sydney-based financial services provider controlled by PEP, in June raised A$710 million to refinance debt and extract a dividend, borrowing almost five times Ebitda from local banks including Westpac Banking Corp (WBC) and CBA. Loans obtained in the U.S. that helped pay dividends lifted their borrowers’ debt to an average 4.5 times Ebitda in September, according to S&P LCD.
“Before the global financial crisis, the market used to think these things were ‘‘dividend distributions’’,” said CLSA’s Johnson. “The reality is that they are distributions of the unrealized increase in the enterprise value.”
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